When the Tax Cuts and Jobs Act (TCJA) was put into place at the end of 2017, one of the biggest disadvantages to taxpayers was the removal of miscellaneous itemized deductions for employee expenses. Employees used to receive a deduction on their schedule A for unreimbursed expenses incurred as an employee, but that is no longer the case. These expenses were things such as uniforms, supplies, license fees, work-related education and home office expenses. Due to this change, some employers may want to consider reimbursing employees for these necessary job expenses, and the proper way to do that is through accountable plans.
Using an accountable plan to reimburse employees for expenses benefits both the company and the employee. The reimbursement is not taxable income to the employee, and there are no payroll or income taxes to be paid by the company on the amount reimbursed.
There is no IRS form to create an accountable plan – the plan must simply meet three requirements.
- The reimbursed expenses must be related to the business
- The employee must substantiate the expenses within a reasonable time period
- The employee must return any unused funds to the company within a reasonable time period
If the three scenarios above are met, the company has a completed accountable plan. If one of the requirements is not met, the reimbursement will have to be added to wage income of the employee, and the company will need to pay payroll taxes on the amount of the reimbursement. The company will want to make sure it only uses this plan for the expenses listed above and not for actual compensation that should be taxed as wages.
If you have any questions about creating accountable plans or discussing if this is a good option for your business, contact a Henry+Horne professional for more information.
KC Kolb, CPA